How did Illinois distinguish a taxable conditional sale from a true lease of equipment?

Plain-English summary

A leasing company submitted synthetic lease documents and asked IDOR to decide whether the arrangement was a true lease or financing, when sales tax was due, what tax base applied, and who reported the assets for property tax.

The GIL did not classify the submitted documents or answer the property-tax question. It supplied the general Illinois sales-tax rules for conditional sales and true leases.

A nominal or one-dollar purchase option, or a guaranteed sale known when the lease began, generally made the transaction a conditional sale. All receipts under that contract were subject to Retailers' Occupation Tax. A lessor buying for resale under the conditional-sale contract could provide a qualifying resale certificate to the supplier.

A true lease generally had no buyout. If it did, the option had to be at fair market value. The lessor was the end user and owed Use Tax on its cost of the property; Illinois imposed no tax on the rental receipts, and the lessee incurred no tax liability under the rule described.

The letter identified one exception to the general true-lease rule: automobiles rented for one year or less were subject to the Automobile Renting Occupation and Use Tax.

What this means for you

Calling an agreement a lease or financing arrangement did not control. The purchase option and whether ownership transfer was effectively assured determined which tax model applied.

Common questions

Was a one-dollar purchase option consistent with a true lease? No; it generally indicated a conditional sale.

Were true-lease rental receipts taxed? No, under the rule described; the lessor paid Use Tax on cost.

Did IDOR classify the submitted synthetic lease? No specific classification appears in the GIL.

Citations and references

• 86 Ill. Adm. Code 130.1405, 130.2010, and 130.220.
• 35 ILCS 155/1 et seq.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/sales-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/sales-tax/2015/st-15-0040-gil.pdf

Original ruling text

ST 15-0040 GIL 06/24/2015 LEASING

Information regarding sales tax liabilities in lease situations may be found at 86 III. Adm. Code
130.220 and 86 Ill. Adm. Code 130.2010. (This is a GIL.)

June 24, 2015

Dear Ms. XXXX:

This letter is in response to your letter dated May 7, 2014, in which you request information.
The Department issues two types of letter rulings. Private Letter Rulings (“PLRs”) are issued by the
Department in response to specific taxpayer inquiries concerning the application of a tax statute or
rule to a particular fact situation. A PLR is binding on the Department, but only as to the taxpayer
who is the subject of the request for ruling and only to the extent the facts recited in the PLR are
correct and complete. Persons seeking PLRs must comply with the procedures for PLRs found in the
Department’s regulations at 2 Ill. Adm. Code 1200.110. The purpose of a General Information Letter
(“GIL”) is to direct taxpayers to Department regulations or other sources of information regarding the
topic about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120. You may access our website at
www.tax.illinois.gov to review regulations, letter rulings and other types of information relevant to your
inquiry.

The nature of your inquiry and the information you have provided require that we respond with
a GIL. In your letter you have stated and made inquiry as follows:

We are a Leasing Company and attached is our Synthetic Lease documents we would
like the State to review, make an opinion and determine the structure of whether it is a
true lease or a financing arrangement.

Upon determining the structure of the transaction, please communicate whether sales
tax is due upfront or on the rental stream.

If sales tax is due upfront, then please specify if upfront on the equipment cost or the
sum of the rental stream. Also, please specify who is responsible for the reporting/filing
of the asset/s for property tax purposes as well.

With that said, please see the attached documents and we await for your response in
writing for your opinion of our Synthetic Lease documents. If you need to contact me
please call me at xXxx-XXX-XXXxX.

We thank you for your cooperation.

DEPARTMENT’S RESPONSE:

For Illinois sales tax purposes, there are two types of leasing situations: conditional sales and
true leases. A conditional sale is usually characterized by a nominal or one dollar purchase option at
the close of the lease term. Stated otherwise, if lessors are guaranteed at the time of the lease that

the leased property will be sold, this transaction is considered to be a conditional sale at the outset of
the transaction, thus making all receipts subject to Retailers’ Occupation Tax. Persons who purchase
items for resale under conditional sales contracts can avoid paying tax to suppliers by providing
certificates of resale that contain all the information set forth in 86 III. Adm. Code 130.1405. All
receipts received by a lessor/retailer under a conditional sales contract are subject to Retailers’
Occupation Tax. See 86 Ill. Adm. Code 130.2010.

In contrast, a true lease generally has no buy out provision at the close of the lease. If a buyout
provision does exist, it must be a fair market value buy out option in order to maintain the character of
the true lease. Lessors of tangible personal property under true leases in Illinois are deemed end
users of the property to be leased. See 86 Ill. Adm. Code 130.220. As end users of tangible personal
property located in Illinois, lessors owe Use Tax on their cost price of such property. The State of
Illinois imposes no tax on rental receipts. Consequently, lessees incur no tax liability.

The above guidelines are applicable to all true leases of tangible personal property in Illinois
except for automobiles leased under terms of one year or less, which are subject to the Automobile
Renting Occupation and Use Tax found at 35 ILCS 155/1 et seq.

| hope this information is helpful. If you require additional information, please visit our website
at www.tax.illinois.gov or contact the Department’s Taxpayer Information Division at (217) 782-3336.

Very truly yours,

Samuel J. Moore
Associate Counsel

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